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Monetary policy and financial stability
Stephen CecchettiHead of Monetary and Economic DepartmentEconomic AdviserBank for International Settlements
OeNB Conference on European Economic Integration Catching-up strategies after the crisis
Vienna, 15 November 2010
The views expressed in this presentation are those of the author and not necessarily those of the BIS.
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Outline
1. Global monetary conditions and emerging markets
2. Regulatory reforms and credit supply
3. Implications for monetary policy and financial stability in CEE
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1. Global monetary conditions and emerging markets
Growth divergence across the global economy: • US and Japan; • within the euro area; • advanced economies vs emerging markets
Global monetary conditions to remain easy: • QE2 in US • comprehensive monetary easing in Japan• Falling bond yields in the G3 economies
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Capital flows to emerging marketsStrong portfolio inflows to emerging Asia and Latin America…
Net flows into emerging market equity and bond funds1 In billions of US dollars
Asia2 Latin America3
–20
–10
0
10
20
30
2007 2008 2009 2010
BondEquity
–20
–10
0
10
20
30
2007 2008 2009 2010 1 Sums of weekly data up to 3 November, 2010; sums across economies listed. 2 China, Chinese Taipei, Hong Kong, India, Indonesia,Korea, Malaysia, Philippines, Singapore, Thailand. 3 Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela.
Source: EPFR.
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… but not yet in CEE, except Russia and Turkey
Net flows into CEE equity and bond funds1 In billions of US dollars
Central Europe2 Russia and Turkey
-4.0
-2.0
0.0
2.0
4.0
Q1:07 Q3:07 Q1:08 Q3:08 Q1:09 Q3:09 Q1:10 Q3:10
-4.0
-2.0
0.0
2.0
4.0
Q1:07 Q3:07 Q1:08 Q3:08 Q1:09 Q3:09 Q1:10 Q3:10
1 Sums of weekly data up to 10 November, 2010; sums across economies listed. 2 Czech Republic, Hungary and Poland. Source: EPFR.
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Cross-border bank lending to emerging markets: Resumed to emerging Asia & Latin America (inflows higher than 2007);
stopped declining in CEE; still declining in CIS
Table 1 Cross-border bank lending to emerging market economies1
In billions of US dollars
2009 2010 2007 2008 2009
Q3 Q4 Q1 Q2
Total EMEs 512 128 –149 –62 68 116 95
Asia2 111 –59 11 8 47 72 48 Hong Kong and Singapore 140 42 –48 –35 32 40 40 Latin America3 61 22 –19 –7 6 17 15 CEE4 125 107 –39 –8 –2 –9 0 CIS5 75 16 –53 –20 –14 –4 –8
1 External loans of BIS reporting banks (on the residence basis) vis-à-vis individual emerging market economies; exchange rate adjusted changes in gross amounts outstanding. Does not include changes in reporting banks’ holdings of emerging market securities. 2 China, Chinese Taipei, India, Indonesia, Korea, Malaysia, the Philippines and Thailand. 3 Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. 4 Total of 10 new EU member states from central and eastern Europe, south-eastern Europe (including Turkey). 5 Russia, Ukraine and Kazakhstan. Source: BIS, locational banking statistics.
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Cross-border bank lending to emerging markets:External loans outstanding near peak pre-crisis levels, except in CEE
External loans of BIS reporting banks vis-à-vis emerging market regions Amounts outstanding at end-quarter
In billions of US dollars
696724
549
708
315332
0
100
200
300
400
500
600
700
800
Q4:95 Q4:96 Q4:97 Q4:98 Q4:99 Q4:00 Q4:01 Q4:02 Q4:03 Q4:04 Q4:05 Q4:06 Q4:07 Q4:08 Q4:09
Asia
Emerging Europe
Latin America
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Policy challenges related to capital inflows:Rising equity prices add to pressures in emerging Asia,
Latin America, Turkey
Equity prices1 2 August 2010 = 100
Asia Latin America Other EMEs
70
85
100
115
130
145
Q1 2010 Q2 2010 Q3 2010 Q4 2010
ChinaIndiaIndonesiaKoreaPhilippinesThailand
70
85
100
115
130
145
Q1 2010 Q2 2010 Q3 2010 Q4 2010
ArgentinaBrazilChileMexicoPeru
70
85
100
115
130
145
Q1 2010 Q2 2010 Q3 2010 Q4 2010
HungaryPolandRussiaSouth AfricaTurkey
1 In local currency. Sources: Bloomberg; Datastream.
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Policy challenges:Falling local currency bond yields, despite policy rate hikes.Rising foreign investor ownership of local bonds.
Local currency bond yields1 In percent
Asia Latin America Other EMEs
0
2
4
6
8
10
12
14
Q1 2010 Q2 2010 Q3 2010 Q4 2010
ChinaIndonesiaKorea
MalaysiaPhilippinesThailand
0
2
4
6
8
10
12
14
Q1 2010 Q2 2010 Q3 2010 Q4 2010
BrazilChileColombiaMexicoPeru
0
2
4
6
8
10
12
14
Q1 2010 Q2 2010 Q3 2010 Q4 2010
HungaryPolandRussia
South AfricaTurkey
1 Ten-year government bonds; for Brazil, 3 year; for Chile, 9 year; for Turkey, 2 year.
Sources: Bloomberg; national data.
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Policy challenges:Will inflows stay or reverse?Appreciating exchange rates, concerns about volatility, competitiveness.(CEE countries have not resisted ER appreciation, unlike other EMEs)
Changes in nominal exchange rates1 In percent
–20
–10
0
10
20
HU CZ PL IN ZA KR MX TR PH TW TH SG CN RU BR ID MY CL HK PE AR CO
Change between Sep10 - Oct10Change between Jan10 - Aug10
1 US dollars per unit of local currency; an increase indicates appreciation of local currency. AR = Argentina; BR = Brazil; CL = Chile; CN = China; CO = Colombia; CZ = Czech Republic; HK = Hong Kong SAR; HU = Hungary; ID= Indonesia; IN = India; KR = Korea; MX = Mexico; MY = Malaysia; PE = Peru; PH = Philippines; PL = Poland; RU = Russia; SG =Singapore; TH = Thailand; TR = Turkey; TW = Chinese Taipei; ZA = South Africa. Sources: Bloomberg; Datastream; national data.
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Policy responses to capital inflowsReserves accumulation: resumed in Asia, Latin America, not in CEE
Reserve accumulation In billions of US dollars
0
50
100
150
200
250
300
KR BR TH MY MX PL TR HU CZ ZA
July 2009Latest data in 2010
Sources: CEIC; Datastream; IMF, International Financial Statistics; national banks.
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2. Regulatory reforms and credit supply CEE faces a particular problem:
• regulatory reforms could limit credit supply • bank based, foreign-owned banking systems, high exposure
Liquidity: • greater emphasis on local deposit gathering; • centralising wholesale funding on the parent level
Capital: • major EU banking groups active in CEE • local banking systems relatively well capitalised
Remaining concern about parent banks: • could change credit policies; • turn to CEE subsidiaries for help with capital; • dispose some units
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3. Implications for CEE monetary policy & financial stability
External financing conditions:- Low global interest rates - Regulatory reforms – some tightening of external credit possible
Domestic monetary policy environment: - Slow recovery, weak post-crisis credit demand, low inflation- Low domestic interest rates - Banks consolidating operations, repairing balance sheets- Central banks assessing how policy frameworks performed
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3. Implications for monetary policy and financial stability
Monetary policy in transition Existing policy frameworks performed relatively well during the crisis:
currency collapses and banking crises avoided Extensive use of macro-prudential tools in region However, monetary policy will again need to address:
• capital inflows, • asset prices, • catching-up issues
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CEE is destined to grow faster than the euro area2011-15 projections cluster around 3-5% p.a.
Real GDP growth Annual percentage changes
–20
–10
0
10
20
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Czech RepublicHungaryPoland
–20
–10
0
10
20
02 03 04 05 06 07 08 09 10 11 12 13 14 15
BulgariaEstoniaLatviaLithuania
–20
–10
0
10
20
02 03 04 05 06 07 08 09 10 11 12 13 14 15
CroatiaRomaniaSerbiaTurkey
Source: World Economic Outlook (September 2010).
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Diversification motives, high long-term rates attract inflows
Long term interest rates1
0
3
6
9
12
15
LV LT HU HR BG PL SK CZ
End-2009End-2010 (September)End-2010 (October)
BG = Bulgaria; CZ = Czech Republic; HR = Croatia; HU = Hungary; LT = Lithuania; LV = Latvia; PL = Poland; SK = Slovakia.
1 Long-term domestic currency government bonds; the horizontal line refers to the 10-year German benchmark bond; in per cent.
Sources: ECB; Datastream; national data.
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Capital flows unlikely to return to the real estate sector It will take years for household debt overhang and
excess supply of housing and commercial property to normalise
House prices
End-2006 = 100
0
25
50
75
100
125
150
175
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
BulgariaEstoniaLatviaLithuania
0
25
50
75
100
125
150
175
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Czech RepublicCroatiaHungarySlovakia
Source: BIS; central banks.
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Some inflows could be channelled to public sector Crowding-out private sector, weakening incentives for fiscal consolidation
Bank credit to the government
Annual changes, as a percentage of 2008 GDP
–4
–2
0
2
4
6
8
TR SK RO RS SI CZ HR PL AL MK LT BA EE BG HU LV
2008200920101
AL = Albania; BA = Bosnia-Herzegovina; BG = Bulgaria; CZ = the Czech Republic; EE = Estonia; HR = Croatia; HU = Hungary; LT = Lithuania; LV = Latvia; MK = Macedonia; PL = Poland; RO = Romania; RS = Serbia; SI = Slovenia; SK = Slovakia; TR = Turkey. 1 Latest available. Sources: IMF; national data.
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Exchange rates could become volatile againExchange rate flexibility has served CEE countries well As has labour market flexibility in countries with fixed exchange rates
Exchange rates1
70
80
90
100
110
120
2008 2009 2010
Czech RepublicHungary
PolandTurkey
70
80
90
100
110
120
2008 2009 2010
AlbaniaCroatiaMacedonia
RomaniaSerbia
70
80
90
100
110
120
2008 2009 2010
BulgariaEstoniaLatviaLithuania
1 December 2007 = 100; euro per unit of local currency (nominal effective exchange rates for Bulgaria, Estonia, Latvia and Lithuania). An increase indicates an appreciation; monthly averages.
Sources: ECB; Datastream; national data; BIS.
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Conclusion
Monetary policy is in transition period Existing policy frameworks performed relatively well during the crisis Central banks have experience with the use of macroprudential tools
“Inflation targeting 2.0” should not be a major novelty Be ready to face capital inflows, asset prices, catching-up issues Resist spillovers from policies of other EMEs:
• let exchange rates adjust, • avoid capital controls, • avoid interventions in credit allocation, • avoid a return to financial repression
